The Production Process and Costs Short run Cost

The Production Process and Costs

Short run Cost l Fixed costs: Costs that do not change with changes in output. l Variable costs: Costs that change with changes in output.

Average and Marginal Costs l AFC = (FC) / (Q) l AVC = (TVC) / (Q) l ATC = (TC)/(Q) l MC = d. TC/d. Q

Pl (Price of Labor) is 400 per 1 unit L K L Q TFC 2 0 0 2000 2 1 76 2 2 248 2 3 492 TVC TC

TFC = 2000 Q TFC TVC TC 0 0 76 400 248 800 492 1200 ATF ATV ATC C C - - -

TFC = 2000 Q TVC 0 0 76 400 248 800 492 1200 TC MC

Relations Among Costs l Figure 5 -11 Page 180. The relationship among costs. l Figure 5 -12 Page 183. The relationships among average and marginal costs. l TC = TFC + TVC l ATC = ATFC + ATVC

Algebraic Forms Of Cost Functions l TC(Q) = f + a. Q + b. Q 2 + c. Q 3 a, b, c, f are constants f represents fixed costs TFC=? TVC=? MC=? ATFC=? ATVC=? ATC=?

Case 1. l TC = 20 + 3 Q 2 -Marginal cost of producing 10 units of output? -Average fixed cost of producing 10 units of output? -Average variable cost of producing 10 units of output? -Average total cost of producing 10 units of output?

Case 2. l No. 4 Page 195. TC = 50 + 25 Q + 30 Q 2 + 5 Q 3 - The fixed cost of producing 10 units of output. - The variable cost of producing 10 units of output. - The total cost of producing 10 units of output. - The average fixed cost of producing 10 units of output. - The average variable cost of producing 10 units of output. - The average total cost of producing 10 units of output. - The marginal cost of producing 10 units of output.

Case 3. l No. 6 Page 195 Fixed cost? Variable cost? Total cost? Average fixed cost? Average variable cost? Marginal cost?

Case 3. (Continued) Q TFC 0 10000 TVC TC ATFC ATVC ATC - 100 200 125 300 133 1/3 400 150 500 200 600 250 MC